Blue sky money three: boomerang money

This post meanders and doesn't really come to any clear conclusion. Read at your own risk.

Imagine, just imagine, that every dollar I spent was attached to a very long rubber band; and sooner or later it would return to my wallet to buy something I wanted to sell. Or that every dollar I spent had my name on it, and would eventually return to me to be redeemed for my goods and services. Think of it as "boomerang money", that always returns to the sender.

Within a currency area for a real world (non-boomerang) money, "income=expediture" is always true at the aggregate level, but is not true for each individual. My expenditure is someone else's income. If there are n people in my currency area, and I increase my expenditure by $1, my income will increase by (1/n) times the multiplier. If n is millions of people, (1/n) will be a very small number, so I will ignore the possibility that any extra dollar I spend will return to me as extra demand for the goods and services I want to sell.

Barter is different. If I barter my apple for your banana, it is as if I offered you the following deal: "If will spend $1 to buy your banana if and only if you agree to spend $1 to buy my apple". In barter, my expenditure of an extra $1 creates an extra $1 income for me, and if you accept my offer, your expenditure of an extra $1 creates an extra $1 income for you. With barter, income=expenditure is true at the individual level.

Barter is like boomerang money. Boomerang money is like barter. My expenditure of an extra $1 of boomerang money will create  an extra $1 of income for me. With boomerang money, income=expenditure is true at the individual level. (OK, with maybe a time-lag).

A "keynesian" (it's not just keynesian) deficient-demand underemployment "equilibrium" (let's avoid arguments about whether it's really an equilibrium) is a consequence of the fact that real-world money is not boomerang money. If the underemployed individual spends an extra $1 of real world money, only a fraction (1/n) of the extra income that creates returns to that individual. The remaining (n-1)/n, which is nearly all the benefits, goes to other individuals. It's like the common proprty resource problem; if I pick up litter in the park, where n people use the park, only (1/n) of the benefits return to me. If people in a keynesian deficient-demand underemployment equilibrium could use boomerang money, this internalises the externality. Each underemployed individual would immediately increase his spending, since he knows his income will increase dollar for dollar, until he is fully-employed.

Personal debt is not like boomerang money. I can pay for goods with credit, and my IOU will sooner or later return to me for redemption. But if my IOU can only be redeemed in money that I myself cannot produce, it does not create a demand for the goods and services that I can produce or want to sell. Only if I paid for goods with an IOU for the apples that I myself produce and want to sell, would my IOU be boomerang money.

Perhaps Local Exchange Trading Systems are an attempt to create something that approximates boomerang money. With a smaller number of participants, (1/n) is a larger number. The individual reasons that sooner or later an extra $1 he spends will return to him as demand for the goods and services he wants to sell. "The money stays in the community". But there's a tension between having a currency area with a small number of participants to internalise the externality, and having a currency area with a large number of participants so that it's more likely you will find a trading partner who wants to sell what you want to buy or buy what you want to sell.

As I have argued in previous posts: an excess demand for the existing medium of exchange is what causes deficient-demand recessions; and at the same time it creates an incentive for people to engage in barter, and to start setting up and using new monetary exchange systems. And this is what we seem to observe.

I think that the concept of boomerang money might prove useful in helping us understand how these new monetary systems can get started. But my head is not 100% clear on it yet.

Comments

[Andy Harless]

"With barter, income=expenditure is true at the individual level."

Only if you don't allow borrowing. I could give you an apple with the understanding that you will repay me an equal value (perhaps plus interest) in the future. (In the simplest case, "equal value" means you have to give me an actual apple at some time in the future, but our agreement could also specify acceptable substitutes.) In that case your expenditure exceeds your income.

"Inside money" is basically just debt, and AFAICT the only inherent difference from barter-based borrowing is that there is a unit of account that determines what is an acceptable repayment. Some people argue that "outside money" is the same way, except that it is the government doing the borrowing, and of course the borrower in this case has the ability to manipulate the unit of account. In both cases it's important that money is highly liquid, but that could be true for barter commodities too. (I suppose you'd say that, when a commodity is liquid enough to be used as a medium of exchange, then it is money, but it's not clear to me to what extent such "money" is different from any other saleable inventory, which can also be hoarded. An inventory of something that is expected to remain in wide demand, even if it's not a conventional medium of exchange, can create the same disconnect between expected income and intended expenditure.)

[Ian Lippert]

"Within a currency area for a real world (non-boomerang) money, "income=expediture" is always true at the aggregate level, but is not true for each individual. My expenditure is someone else's income. If there are n people in my currency area, and I increase my expenditure by $1, my income will increase by (1/n) times the multiplier. If n is millions of people, (1/n) will be a very small number, so I will ignore the possibility that any extra dollar I spend will return to me as extra demand for the goods and services I want to sell.

Barter is different. If I barter my apple for your banana, it is as if I offered you the following deal: "If will spend $1 to buy your banana if and only if you agree to spend $1 to buy my apple". In barter, my expenditure of an extra $1 creates an extra $1 income for me, and if you accept my offer, your expenditure of an extra $1 creates an extra $1 income for you. With barter, income=expenditure is true at the individual level."

I think you are deriving this backwards. In a barter system your wealth is determined by how much demand there is for your specialized labour and how much other people are willing to give you goods that they produce in exchange for goods that you produce. In a monetary system your wealth is not just how much money people are willing to give you for your services (ie your income being determined by others expenditure) but also how many goods those dollars are capable of purchasing.

The circulation of money does not create wealth it simply acts of a unit of account for the barter system that is running underneath it. In the monetary system all costs are wage costs because only people can accept dollars and so it might seem like eventually that money must come back around to those that spend it in the first place. But in the barter system there are costs of production (ie the consumption of material goods through the production process) that, if not replaced, will mean that the dollar that circulates back to you will be worth less, in real goods, than the dollar you initially sent off into circulation.

I think this boomerang effect (isnt this just the keynsian multiplier?) is just an illusion (the money illusion?) of operating within a monetary economy. If you equate money with wealth then you will think that eventually that wealth must come back to you. But if you equate your wealth with the demand for your production (Say's Law) then money is just a medium of exchange used to facilitate the barter economy.

[The Keystone Garter]

Creative thought is good. If the world is destined to age like Japan we are going to have problems staying away from 0% interest rates and the human behaviour of looking for positive returns might be bad. My thoughts are about why Fitch's reaffirmed our AAA Credit. It is probably what we had in 2006 when running surpluses and hot USA economy. Then issue was inflation. Now we know about sub-primes and EU debt being addressed. Lower debt interest rate costs. But with taxes all cut and USA and Canada needing to cut debt even more...I wonder why the Ratings are relative. Yes Canada is better relatively now than a few years ago. But I want a measure of the human capital of our rich and powerful actors/Crowns/companies.

I think your time-lag makes your system like existing finance. It is just, debt is being used by individuals instead of firms or other legal entities. It would be nice to have forward job contracts that you can accept and borrow off of. I'd take a labour position right now for next winter if was indoors and safe/moderately-physical. I'd borrow off that to rent somewhere. The problem with your system is there is no forward labourer job market...what else to use if not bank reserves and big gov bailout? Yunus used the entrepreneurial behaviour of IDK, 1/3-2/3 of a poor country. Van City had trouble with employee costs with 1st world micro finance. Using employment activity for loans is a devastating feedback in a recession. Need some sort of human capital metric maybe? Everyone has a rubberband snapback: is bankruptcy. Except limited liability firms and Crowns, banking industry, to big to fail industries, etc.

[Luis H Arroyo]

Yes I agree, in a barter system the individuals get always 1$ return for 1$ expenditure. Including the case there are lending & borrowing, because is an individual lending/borrowing process (hey, I lend you 10 coconuts for a year, you return me 11 CCs). So, it is possible to choice between present and future consumption, so what?. There is a risk of individual default, but what I expend return to my pocket inmediatly. once it has circulated all around. This risk is an individual face to an individual.
By definition, if there is a bank process of lending there is a form of money, coconuts, for instance. But that is a money economy, not a barter one.

[JP Koning]

I'm confused about the idea of income=expenditure.

You say that in a barter economy, when I trade an apple for a banana, my expenditure of apples has created an income of bananas. Therefore income=expenditure.

Then you say that this is not the case in a monetary economy. But even in a monetary economy, when I trade an apple for dollars, my expenditure of apples has created an income of dollars. Or if I trade dollars for apples, my expenditure of dollars has created an income of apples. In all cases income=expenditure.

[Ron Ronson]

For any given commodity expenditure must equal income: apple expenditure = apple income, banana expenditure = banana income etc. In a money economy it is additionally true that money expenditure = money income.

Under barter I do not think it is true to say that expenditure = income at the individual level. If someone trades a banana for an apple then they value the apple more than the banana - so they must think that their income > expenditure.

[Nick Rowe]

Thanks for the comments guys.

On reflection, this was a rather confused and cruddy post. In particular, I need to think some more about what I mean by "income" and "expenditure". I knew I wasn't wanting to use those terms in their standard National income accounting senses ("income and expenditure on newly-produced goods and services"), but I hadn't figured out precisely what sense I was using them, so what I was saying made sense and wasn't vacuous.

[Nick Rowe]

Ian: "The circulation of money does not create wealth it simply acts of a unit of account for the barter system that is running underneath it."

Yes and no. Money also acts as a medium of exchange, not just a unit of account. When a monetary system is working properly, the economy is working as if it were a hypothetical frictionless barter economy. But real world barter has frictions, and money is supposed to reduce those frictions. But if a monetary system is working badly, it is not at all like a hypothetical frictionless barter economy.

[Ian Lippert]

I was just trying to clarify the whole income=expenditure claim. While it might be true that income=expenditure, it doesnt really mean anything if we dont know what that income can purchase. In a barter economy my "income" is what I can trade for the products of my labour. In a money system people dont have wealth because they circulate currency, they still have wealth because they are producing and their wealth is based on how much they produce not how fast they can circulate currency. There is almost no chance of any of my wealth "coming back to me" in the sense that if we all spend more more will come back to us. Same goes for the aggregate, income may equal expenditure but wealth does not equal expenditure. This is where the Keynesians go wrong in my opinion, thinking in aggregates skew your perception of how the economy works.

[peterh32]

I think your parentheses are in the wrong place. Not
(n-1)/n
but rather
n-(1/n)

[The Keystone Garter]

""There is almost no chance of any of my wealth "coming back to me" in the sense that if we all spend more more will come back to us.""

Yep. Ian, I think the main diminishing return among rich people is their time. They can't work anymore hours even with the fastest car. They also incur diminishing ROI of their productivity. Mainly, labour mobility is limited. Even if you give a good taxi cab dispatcher the cash to build an air-traffic controller career, the employer isn't instantaneously going to make the switch...
It would be nice if probable productivity gains had easier access to credit. Beyond that, I'd be worried about getting my money back if just giving to people. Probably the government should do this a bit, but not banks.